SME Policy Index: Latin America and the Caribbean 2024

4. Dimension 2: Operational environment and simplification of procedures

Abstract

Regulations play a pivotal role in facilitating the effective functioning of economies and societies, establishing the essential "rules of the game" for citizens, businesses, government, and civil society. Well-crafted regulations contribute significantly to economic growth by promoting healthy competition and market efficiency.

Despite the challenges, there is a positive trend in the operational environment and simplification of procedures for SMEs across most of the LA9 countries, indicating notable improvements compared to the 2019 assessment, particularly driven by advancements in the e-government sub-dimension. However, intricate regulations and substantial administrative barriers persist, presenting challenges that require attention for sustained progress. This upward trajectory suggests the potential for further advancements.

Assessment Framework

Regulations play a crucial role in facilitating the proper functioning of economies and societies, establishing the "rules of the game" for citizens, businesses, government, and civil society. They serve as the foundation for markets, safeguard the rights and safety of citizens, and ensure the provision of public goods and services. Well-crafted regulations contribute significantly to economic growth by fostering healthy competition and market efficiency. However, regulations, both direct and indirect, often impose disproportionate costs on small-scale enterprises. Poorly designed or inadequately enforced regulations can burden enterprises with administrative complexities, high compliance costs, and distort market dynamics. The complexity and expense associated with regulations can drive segments of the SME population toward informality. The regulatory framework of a country significantly shapes the operational environment for SMEs, emphasising the need for regulatory reforms as an integral component of SME policy.

A substantial methodological change has been introduced in this dimension since the previous evaluation. First, the assessment framework for the four sub-dimensions has been enhanced with additional questions, aiming to provide a more detailed assessment. Second, indicators from the World Bank’s Doing Business report, previously used to evaluate the effectiveness of company registration procedures and the ease of filing taxes, are no longer considered for scoring due to the discontinuation of that exercise, although some of its findings are utilised for the analysis text. Additionally, it incorporates a not-scored analysis of the gender approach within this dimension.

The assessment framework for this dimension comprises (see Figure 4.1):

• Legislative simplification and Regulatory Impact Analysis (RIA): This sub-dimension examines the legislative simplification and regulatory reform processes, incorporating the use of Regulatory Impact Analysis (RIA) as a tool to enhance the quality of new legislative and regulatory acts.

• Sub-dimensions 2.2 (Company registration) and 2.3 (Ease of filing taxes) delve into regulatory applications. Sub-dimension 2.2 addresses the intricacies of company registration and the initiation of business operations, while sub-dimension 2.3 focuses on the system governing tax filing and payment for SMEs.

• E-government: The indicator within this sub-dimension analyses the provisions of digital government services, specifically those pertaining to SME operations. Well-designed digital government platforms have the potential to decrease administrative burdens, enhance government-to-business communications, and reduce operational costs for SMEs.

Figure 4.1. Assessment framework - Operational environment and simplification of procedures

Upon aggregating the assessment scores for this dimension, a weight of 30% has been allocated to sub-dimension 2.1, with sub-dimensions 2.2 and 2.3 each receiving a weight of 25%. The final dimension, focusing on e-government services, carries a weight of 20%.

Analysis

Despite the challenges, there is a positive trend in the operational environment for SMEs in most of the LA9 countries (see Figure 4.2), reflecting notable improvements compared to the 2019 evaluation, primarily driven by advancements in the e-government sub-dimension. However, intricate regulations and substantial administrative barriers continue to pose challenges that need to be addressed for sustained progress. This positive trajectory indicates a potential for further advancements.

Legislative simplification and regulatory reforms are not systematically pursued across most of these countries, with only Chile, Colombia, and Mexico adopting a more organised approach. However, even in these nations, the reform process has encountered obstacles over the last four years. The focus on addressing the challenges posed by the COVID-19 pandemic, coupled with episodes of political and economic instability in certain LA9 countries, has contributed to the current impasse. Prioritising improvements in the regulatory framework and the reduction of administrative burdens is crucial for fostering economic growth and effectively curbing informality in the SME sector.

Figure 4.2. Weighted scores for Dimension 2: Operational Environment and Simplification of Procedures

Note: Scores are on a scale of 1 to 5, with 5 being the highest. The comparison with 2019 is not exact due to changes in the methodology. Please refer to Chapter 2 for further information on the methodology. 2019 data for Brazil and Paraguay are not available as they did not participate in the 2019 assessment.

Sub-dimension 2.1: Legislative simplification and regulatory impact analysis

Table 4.1. Sub-dimension 2.1 scores: Legislative simplification and regulatory impact analysis

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	1.63	3.08	1.90	1.87	4	3.65	3.90	2.60	3.12	2.86	2.12	3.54

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

The findings of the 2024 LAC SME Policy Index (SME PI) reveal that legislative simplification and regulatory reforms in most of the LA9 countries are still in an early phase, with a regional average sub-dimension score of 2.86. Notably, Chile, Mexico, and Colombia stand out as the countries where significant progress has been achieved, supported by a relatively well-developed institutional framework for legislative and regulatory reform. However, over the past four years, the pace of reform has considerably slowed across the region. Emergency measures to address the impact of the COVID-19 pandemic, coupled with political instability disrupting parliamentary activities, have hindered the pursuit of comprehensive reforms.

Most LA9 countries lack a medium-term strategy or plan for legislative simplification and regulatory reforms. There is a notable absence of systematic reviews of legislative and regulatory acts affecting private enterprise operations, eliminating redundant acts, and updating laws and regulations. When actions are taken, they tend to address specific issues and are often responsive to pressure from the business community, lacking integration into a broader and systemic reform process.

Among the LA9 countries, Chile, Mexico, Colombia, and Peru have embraced a more systematic approach to regulatory reforms

Mexico has implemented a comprehensive strategy for regulatory reform since 2019, with the process being co-ordinated and monitored by the Comisión Nacional de Mejora Regulatoria (National Commission for Regulatory Improvement, CONAMER). In Colombia, the country's accession to the OECD has provided new momentum for regulatory reform, leading to the approval of a new Law on Legislative and Regulatory Reform in 2020. Peru has a regulatory reform plan in place, but the lack of clearly defined implementation timelines has led to disruptions in its execution.

Uruguay, in the past, had a regulatory reform plan as part of the broader Trasforma Uruguay strategy, completed in 2021. However, no new plan has been adopted since then. Argentina, despite having a complex regulatory framework and a challenging operational environment for SMEs, has shown indications of prioritising legislative and regulatory reform under the new government elected in November 2023. The administration is actively working to streamline bureaucracy, announcing plans to submit a bill to Congress to eliminate 160 regulations and establishing a Secretariat for the Simplification of the State.

Brazil has been engaged in regulatory reform for several years, primarily through the establishment of the National Network for the Simplification of Registration and Legalisation of Companies and Businesses (REDESIM) in 2007. However, the reform process faces challenges due to the intricate regulatory environment and overlapping competences between federal and state administrations.

The application of Regulatory Impact Analysis is advancing across the region

The application of RIA varies across the region. Chile, Mexico, Colombia, and Peru have established the legal obligation to systematically apply RIA, with Colombia additionally incorporating an RIA SME test for major legislative or regulatory acts. In Brazil, RIA is applied selectively to significant pieces of legislation, and the guidelines were approved in June 2020. Ecuador, Paraguay, and Uruguay are in the process of adopting RIA methodology, with plans to establish RIA units within the state administration.

Due to the absence of a medium-term plan, monitoring and evaluation mechanisms in this area are relatively limited. Mexico, however, sets an example of good practice, with CONAMER regularly monitoring the implementation of regulatory reform plans.

Sub-dimension 2.2: Company registration

This dimension revolves around the process of registering a new company and, more broadly, initiating a new business. This process includes not only registration in the public company register but also the notification and, if necessary, registration with other branches of public administration such as the tax office, labour office, local administration, and the issuance of business licenses.

As outlined in the Assessment Framework section of this chapter, the indicators for this sub-dimension in the 2019 LAC SME PI were derived from the World Bank Doing Business Report under the "Starting a business" dimension. Since the Doing Business survey was discontinued in September 2022, the methodology for this sub-dimension has been partially modified. Without recent Doing Business reports, the focus has shifted to changes introduced at the country level since the last published report (2020) and the availability of online registration. Consequently, the 2024 scores are not fully comparable with those of the 2019 LAC SME PI.

Table 4.2. Sub-dimension 2.2 scores: Company registration

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	2.54	3.06	2.54	3.48	4.20	3.82	3.90	2.89	2.70	3.24	2.90	3.70

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

Complex, lengthy, and costly procedures for company registration and starting a business are factors that contribute to pushing new enterprises towards informality. The 2024 assessment reveals (see Table 4.2) that procedures for company registration and starting a business in the LA9 region continue to be intricate, time-consuming, and frequently costly. The regional average for this sub-dimension stands at 3.24. Approximately half of the countries included in the report (Argentina, Ecuador, Paraguay, and Peru) have received a score below 3, underscoring the substantial gap from the adoption of good practices.

Despite efforts, the procedures for registering a company in LA9 countries continue to be costly and time-consuming

The complexity of company registration and starting a business procedure is often exacerbated by the sequential nature of the steps required for new entrepreneurs. One-Stop Shops (OSS), which provide a centralised location for entrepreneurs to complete all registration procedures, are only available in Chile, Colombia, and Mexico. Uruguay has implemented a system of multiple windows at a single location for all involved administrations. In contrast, in all other LA9 countries, entrepreneurs must personally contact each administration in sequence.

The necessity to undergo separate registration processes with the company registry and tax administration contributes to the time-consuming nature of the process, a common situation in most LA9 countries. Companies often receive two or more registration numbers, with the tax registry number usually serving as the primary identifier for interactions with public administration. This holds true for Brazil, Chile, Colombia, Mexico, Paraguay, and Uruguay. The duration of the process is frequently extended by requirements to register with local authorities and obtain a local business license.

In Brazil, despite reforms introduced by REDESIM and normative instructions from the Departamento Nacional de Registro Empresarial e Integração (National Department of Business Registration and Integration, DREI), company registration procedures remain relatively lengthy and time-consuming. This is partly due to the need for new companies in several states to register with local tax authorities and obtain a local business license, in addition to federal registrations. The costs of company registration are often augmented by mandatory legal and notary services.

The adoption of online registration systems and their monitoring mechanisms are gaining momentum in LA9 countries, aiming to enhance the efficiency and quality of the company registration process

The adoption of online registration is still in its early stages in most LA9 countries. Currently, dedicated electronic platforms for online company registration are available in Chile, Colombia, and Mexico, while certain registration procedures can be performed online in Argentina, Ecuador, Paraguay, and Uruguay. In Brazil, online company registration is limited to single entrepreneurs.

Monitoring of company registration and starting a business procedure is also in its early stages of development, with a few exceptions. Brazil's federal government has introduced the Company Map tool to track company registration and closure processes across the country, providing monthly data on procedure completion, new registrations, and closures by location and type of activity. Mexico's CONAMER regularly monitors the implementation of reforms related to company registration and starting a business procedure.

Sub-dimension 2.3: Ease of filing taxes

Similarly, to the Company Registration sub-dimension, some indicators used in the 2019 LAC SME PI relied on data and information from the World Bank Doing Business. The 2024 edition considers changes introduced at the country level since 2020, incorporating elements such as the presence of simplified tax regimes for SMEs and tax administration procedures for SMEs. Consequently, the scores for this sub-dimension in 2019 and 2024 are not directly comparable.

Table 4.3. Sub-dimension 2.3 scores: Ease of filling taxes

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	2.5	2.5	2.5	3.5	3.22	3.2	2.9	2.33	2.4	2.78	2.75	2.91

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

Efforts to streamline and simplify tax payment processes could lead to a more favourable environment for SMEs in LA9 countries

The tax regime for SMEs in most LAC 9 countries is characterised by substantial administrative burdens and prolonged procedures for filing and payment. The average number of tax payments per year is high, and the time required to fulfil tax administration obligations is often lengthy. In some cases, there is considerable tax pressure.

In the 2024 assessment, scores for this dimension are notably low, with only Chile and Uruguay achieving scores above level 3. Interestingly, these two countries also exhibit the lowest levels of labour informality. The regional LA9 average stands at 2.78.

Since 2019, several LA9 countries have undertaken tax reforms and introduced simplified tax regimes for SMEs

Several countries in the region have undertaken tax reforms and introduced simplified tax regimes for SMEs since 2019. In Argentina, the monotributo range has been extended to micro-enterprises and individual entrepreneurs, accompanied by a "bridge regime" facilitating the transition from monotributo to a full corporate tax regime.

In Brazil, the government implemented measures to simplify tax filings and payments through Simples Nacional and Microempreendedor Individual (Individual Microentrepreneurs, MEI) schemes, with ongoing efforts through two permanent committees dedicated to tax reform.

Chile is currently undergoing a comprehensive tax reform, introducing a VAT regime for service sales, particularly impacting small-scale enterprises in the service sector. While maintaining a special tax regime for SMEs, Chile has introduced fiscal incentives for startups and those undergoing formalisation, along with a transition “bridge” for SMEs moving to the standard corporate tax regime. Uruguay has implemented a similar transition measure.

Colombia’s progressive tax reform since 2018 aims to enhance tax compliance for small-scale enterprises, while Ecuador introduced a simplified tax regime for micro-enterprises called Régimen Simplificado para Emprendedores y Negocios Populares (Simplified Regime for Entrepreneurs and Popular Businesses, RIMPE). This initiative imposes a turnover tax of 1 to 2% on enterprises with an annual turnover between USD 20,000 and USD 300,000.

In Mexico, the Servicio de Administración Tributaria (Tax Administration Service, SAT) introduced the Régimen Simplificado de Confianza (Simplified Trust Regime, RESICO) to simplify tax-filing procedures for individual entrepreneurs and small-scale enterprises. This initiative imposes a turnover tax ranging from 1 to 2.5% for enterprises and individual entrepreneurs below a set annual turnover threshold, contributing to lower tax charges and reducing enterprise informality.

Paraguay has also been actively implementing tax reforms since 2019, involving a reduction in the number of taxes on private enterprises, simplification of tax-filing procedures, and the introduction of a simplified tax regime for SMEs.

Sub-dimension 2.4: E-government

Table 4.4. Sub-dimension 2.4 scores: E-government

	Argentina	Brazil	Paraguay	Uruguay	Chile	Colombia	Mexico	Peru	Ecuador	LA9	Mercosur	PA
Total score	4.08	3.60	2.83	4.70	4.20	4	4.77	3.88	3.40	3.94	3.80	4.21

Note: Scores are on a scale of 1 to 5, with 5 being the highest.

Over the past four years, significant strides have been made across most of the LA9 countries in enhancing the provision of e-government services, and digitalisation (Dimension 8) benefiting both the public and, in many instances, SMEs. The imperative to restrict physical access to public offices, a measure implemented to curb the spread of the COVID-19, has acted as a catalyst, accelerating the development and implementation of e-government services.

LA9 countries are making progress in delivering e-government services

Argentina, Chile, Colombia, Mexico, and Uruguay have adopted national plans for the digitalisation of public administration, offering a broad range of e-government services. Tax administrations in these countries have established electronic platforms for processing tax declarations. Brazil, Ecuador, and Peru are at an intermediate stage, actively working to expand their e-government service offerings. Paraguay is in the early stages of development, formulating national plans for public administration digitalisation. The regional average for this sub-dimension is 3.94.

Mexico, Chile, and Uruguay are at the forefront in providing e-government services

Mexico, Chile, and Uruguay serve as good case studies in the realm of digital transformation within public administration and the provision of e-government services.

Mexico is leading the region in this area. It launched its first national digitalisation strategy in 2013, focusing on delivering e-services to both citizens and businesses. Presently, the country is executing its third National Digitalisation Strategy (2021-2024), with goals centred on expanding digital government tools, enhancing digital security, and narrowing the digital divide. The Secretaría de Economía (Ministry of Economy, SE) manages the MIPYMES.MX platform, dedicated to supporting the digital transformation of SMEs and enhancing their access to e-government services.

Chile has also been proactive in digitalising government services for several years. The nation launched its first national digital transformation plan in 2015, emphasising the promotion of interoperability across data banks managed by various public administrations. The array of e-government services available for SMEs encompasses tax filing, data reporting, and company registration procedures. The Digitaliza tu PYME platform plays a pivotal role in assisting SMEs in utilizing e-government services and fostering digital transformation.

Uruguay has been promoting the digital transformation of state administration and developing e-government services for over a decade, making substantial progress in this domain. The specialised agency, la Agencia de Gobierno Electrónico y Sociedad de la Información y del Conocimiento (Agency for Electronic Government, Information and Knowledge Society, AGESIC), operating under the Presidency of the Republic of Uruguay, is responsible for co-ordinating the implementation of national Digital Strategy. The most recent strategy spans the period from 2021 to 2025.

The monitoring of e-government service usage by SMEs is still in its early stages in LA9 countries

While progress has been made in this area, monitoring the usage of e-government services by SMEs is still at an early stage. Public digital agencies, SME development agencies, and organisations should conduct regular surveys to monitor the utilisation of digital platforms by SMEs and identify their needs for training and information.

Operational Environment for the development of women-owned or led SMEs

Among LA9, none have a decentralised national information agency or help centres that exclusively or specifically provide advisory services to women for business creation. Instead, they have centres and/or service portals for entrepreneurs regardless of gender. Noteworthy practices include those of Mexico's National Institute for Women (INMUJERES), which promotes the development of strategies for business creation, facilitating women's economic empowerment. For example, they operate the online store "Hecho en México x Mujeres" within Mercado Libre's digital sales platform. Additionally, Paraguay's Vice Ministry of SMEs implements the REEMUJERPY project, specifically targeted at women.

Furthermore, only Ecuador, Chile, and Uruguay have mechanisms for monitoring and evaluating the business registration process that record disaggregated information by gender. Additionally, there is a notable presence of several national inter-institutional co-ordination committees or councils, predominantly led by National Gender Equality Mechanisms, which are actively involved in executing actions to support women's entrepreneurial spirit. Examples include Brazil's Committee for Female Entrepreneurship, and Ecuador's National Council for Gender Equality. Particularly noteworthy is Paraguay's Ministry of Women, where an Interinstitutional Commission for the implementation of the programme “Ciudad Mujer” exists. This commission comprises various public institutions in the economic empowerment module for women. Their aim is to promote income generation, enhance employability skills, and support the creation of productive entrepreneurship initiatives. Top of Form

The way forward

Table 4.5. Policy recommendations for dimension 2. Operational environment and Simplification of procedures

Policy area	Challenges and opportunities	Policy recommendations
Legislative simplification and Regulatory Impact Analysis (RIA)	A system approach to regulatory reform is still missing in most of the LA9 countries. RIA is systematically applied in only three of the LA9 countries.	Elaborate national plans for legislative simplification and regulatory reform, focusing on the areas that generate the highest barriers to enterprise development. Adopt RIA guidelines and introduce mandatory RIA, if not done yet, in the approval of the new legislative and regulatory acts having a significant impact on the operations of private enterprise
Company registration	Complex, lengthy, and costly procedures act as a barrier to entry for new entrepreneurs and contribute to drive them towards informality.	Review the company registration and starting a business process, taking account of the OECD Product Market Regulation measures on starting a business, and set objectives for reducing the administrative burdens associated with the process.
Ease of filing taxes	Tax filing and tax payments procedures in most of the LA9 countries remain complex and time consuming.	Review tax filing and tax payment procedures to simplify them. Develop online tax platforms. Calculate effective tax rates applied on different typologies of SMEs. Facilitate the transition towards tax compliance and from the simplified regimes to the standard corporate tax regime.
E-government	The development of e-government services could significantly improve communications between enterprises and the public administration and reduce operational costs for SMEs.	Develop e-government platforms, expand the range of e-government services for SMEs. Collect data on platform utilisation by SMEs and conduct information and training programmes to assist SMEs in accessing digital platforms.